Setting the Surcharging Record Straight
Tennessee Attorney General Opinion Letter on Surcharging is Dangerously Deceptive
By: Lorde Astor West
Date: February 15, 2021
Scratchware Execs reached out to the AG in an attempt to set the record straight.
"A merchant relying on the Opinion Letter could be prejudiced by charging a Credit Card Surcharge that is too low for the merchant to recover the full credit card processing costs, and a customer relying on the Opinion Letter could wrongfully report a merchant for a perfectly valid Credit Card Surcharge which, as established earlier, would lead to unnecessary lost time and resources for a merchant who did nothing wrong."
Via Email to:
Ms. Samantha Fisher
Dear Ms. Fisher:
I write today because Tennessee Attorney General Herbert H. Slatery III’s Opinion Letter #21-07 (the “Opinion Letter”) seriously misleads consumers and merchants about their rights, responsibilities, and expectations with respect to the practice of Credit Card Surcharging.
While the following assertions in the Opinion Letter are both correct and important:
“Merchants must not mislead customers by falsely advertising a lower price than they actually charge”;
“Any credit card surcharges need to be communicated clearly and in advance”; and
A true “Cash Discount” will lower the advertised price and can never include a mechanism that raises the posted price at checkout,
the remainder of the information espoused by the Opinion Letter is factually inaccurate and misleading for at least the following reasons.
COVID-19 Surcharges and Credit Card Surcharges are not the same things.
The Opinion Letter begins by commingling the definitions of a “surcharge” and a “credit card transaction surcharge.” A Surcharge is any addition to the regular posted price of a product or service for any reason. Merchants may legally impose a surcharge on many products or services for many reasons, including that their costs for providing a product or service are higher than normal.
COVID-19 surcharges, for example, enable a merchant to recover the additional costs incurred or profits lost as a result of the pandemic. Such increased costs include those related to the need to purchase additional PPE and sanitizing materials. Decreased profits can result from having to run their services at lower capacities to incorporate social distancing measures. Merchants can and often do legally levy a surcharge on all transactions to recover the profits lost from these extraordinary incurred costs and decreased revenues. For example, a restaurant might add a 5% cost to all tickets as a COVID-19 surcharge. Such a surcharge is levied upon all transactions, whether the payment method is cash, check, credit, debit, or otherwise.
Credit Card Surcharges, on the other hand, is a subset of Surcharges. A Credit Card Surcharge is an additional charge imposed solely because a credit card is used as the payment method for a given transaction, and it is designed to allow a merchant to recover the extra cost incurred as a result of having to process the credit card as the payment method for the sale.
Credit Card Surcharges have been in use since long before the COVID-19 pandemic, and they have been the subject of thousands of hours and billions of dollars worth of litigation. Merchants have fought for and won the right to charge Credit Card Surcharges in states that do not explicitly outlaw the practice. In states where Credit Card Surcharging is legal, such as Tennessee, the rules regarding Credit Card Surcharges are contained in the language of the Operating Agreements of the Credit Card Networks, namely Visa, MasterCard, American Express, and Discover.
Credit Card Surcharge rules do not necessarily require disclosure of both cash and credit prices.
The Opinion Letter incorrectly states that for a surcharge to be legal the merchant must post the full price of a product or service using each method of payment accepted. Only two states require such a detailed disclosure: Maine and New York. In both cases, merchants must post both the cost of paying with cash and the cost of paying with a card using dollars and cents.
Elsewhere, however, the Credit Card Networks allow for Credit Card Surcharges where state law does not prohibit them, so long as the merchant discloses the existence of the Credit Card Surcharge in advance and discloses the amount of the surcharge, either a dollar amount or as a percentage.
Thus, merchants relying on the Opinion Letter may be prejudiced by not imposing a Credit Card Surcharge where they can, due to the onerous burden that would be imposed by having to list two prices for every item. Customers relying on the Opinion Letter may wrongfully report merchants for “improper” Credit Card Surcharges even where the fee was legal and proper, costing merchants time and money in having to fight an untrue allegation.
Worse, merchants could be penalized with fines and penalty fees, could incur higher processing fees, or even lose their merchant account, or in worst cases face criminal prosecution all based on the incorrect characterization of the laws and contractual requirements surrounding Credit Card Surcharges contained in the Opinion Letter.
The Credit Card Surcharge Cap is 4% and the Opinion Letter’s arbitrary 1%-1.5% “typical” processing cost is not accurate.
The Credit Card Networks establish that a merchant may properly impose a Credit Card Surcharge that covers all the merchants' costs involved in processing a credit card transaction, up to an absolute ceiling of 4%. The 1%-1.5% “typical” fee stated in the Opinion Letter only reflects the Interchange Fee, i.e., the amount paid to the banks that process the transaction. The Credit Card Surcharge amount, however, can (and should) properly reflect all costs incurred by the merchant, and that includes not only interchange fees, but also processor markup, downgrade costs, assessments, and all other fees that are charged to the merchant on a per-transaction basis. These fees do not “typically” amount to only 1%-1.5%, they can and often do approach 3%, 4%, and even beyond.
Again, a merchant relying on the Opinion Letter could be prejudiced by charging a Credit Card Surcharge that is too low for the merchant to recover the full credit card processing costs, and a customer relying on the Opinion Letter could wrongfully report a merchant for a perfectly valid Credit Card Surcharge which, as established earlier, would lead to unnecessary lost time and resources for a merchant who did nothing wrong.
In conclusion, by conflating the nature of surcharges appearing during the COVID-19 pandemic with those related to the use of credit card transactions, and by disseminating inaccurate information about the requirements of Credit Card Surcharging, the Opinion Letter is damaging to both merchants and customers in the State of Tennessee and should be corrected.
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